Three different measures of valuation are leading one portfolio manager to approach the market with a cautious tone.
“We’re concluding that we’re in a low-return environment and investors should be cautious,” on equities at this juncture, said Chad Morganlander, a portfolio manager at Washington Crossing Advisors.
He considered three measures of valuation that leads him to a more prudent approach right now, he said Tuesday on CNBC’s “Trading Nation.” First, he believes the forward price-earnings multiple on the S&P 500, which is currently nearly 18 times forward earnings, is historically stretched.
Indeed, the forward price-earnings ratio of the S&P 500 for the next 12 months is hovering near its highest level since early 2004, according to FactSet data.
Next, Morganlander said the market cap of the S&P 500 relative to the U.S. nominal gross domestic product is historically high, too. It appears similarly for the Russell 2000, as well as the Wilshire 5000 index, too, he said.
Finally, the S&P 500 market cap relative to the market’s broader enterprise value-to-sales ratio is also historically extended, he said, which gives him pause about the market’s rise at this point.
When rates are low around the world (Morganlander cited the 10-year Treasury note yield, which is historically low at 2.2 percent) investors have “nowhere to go except into more speculative asset classes” such as stocks.
However, investors ought to be cautious when it comes to this measure, as earnings are “highly volatile on the S&P 500 and you can have a time, in recessions, that earnings dip.”
If someone is a growth investor, Morganlander said, it may be prudent to be “balanced,” and allocating half of their assets in equities and half in bonds (which are traditionally considered safer investments).